Works contract (GST) (Dec 2018)

Under GST laws, the definition of ‘Works Contract’ has been restricted to any
work undertaken for an ‘Immovable Property’ unlike in VAT and Service Tax
provisions where works contracts for movable properties were also considered.

'Works contract' has been defined differently at different times leading to lot of
litigations and even amendment in Constitution. The disputes have been on
different issues at different times — whether it is goods for manufacture on
which Central Excise duty will be charged, or is it service where Service Tax will
be charged or is it to be treated as such goods where Sales Tax (state VAT) will
be charged.

Simply put, a Works Contract is essentially a contract of service which may also
involve supply of goods in the execution of the contract. It is basically a
composite supply of both services and goods, with the service clement being
dominant in the contract between parties.

In a general sense, a contract of works, may relate to both movable and

immovable property. e.g. if a sub-contractor, undertakes a sub-contract for the
building work, it would be a works contract in relation to immovable property.
Similarly, if a composite supply in relation to movable property, such as
fabrication / painting / annual maintenance contracts, etc. is undertaken, that
movable property would also come within the broad definition of a Works
Contract.
However, under GST laws, the definition of Works Contract has been restricted
to any work undertaken for an 'Immovable Property' unlike the pre-GST VAT and
Service Tax provisions, where works contracts for movable properties were also
considered.

The Works Contracts has been defined in Section 2(119) of the CGST Act, 2017
as “works contract” means a contract for building, construction, fabrication,
completion, erection, installation, fitting out, improvement, modification, repair,
maintenance, renovation, alteration or commissioning of any immovable property
wherein transfer of property in goods (whether as goods or in some other form)
is involved in the execution of such contract.”

The term works contract has been restricted to contract for building construction,
fabrication etc. of any immovable property only.

Any such composite supply undertaken on goods, say, for example, a fabrication
or paint job done in automotive body shop will not fall within the definition of
term works contract per se under GST. Such contracts would continue to remain
composite supplies, but will not be treated as a Works Contract for the purposes
of GST.

Input Tax Credit

As per Section 17(5)(c) of the CGST Act, input tax credit will not be available in
respect of the works contract services, when supplied for construction of an
immovable property (other than plant and machinery) except where it is an input
service for further supply of Works Contract service.
Thus, ITC for Works Contract can be availed only by one who is in the same line
of business and is using such services received for further supply of Works
Contract service. For example, a building developer may engage services of a
sub-contractor for certain portion of the whole work. The subcontractor will
charge GST in the tax invoice raised on the main contractor. The main contractor
will be entitled to take ITC on the tax invoice raised by his sub-contractor, as his
output is Works Contract service. However, if the main contractor provides works
contract service (other than for plant and machinery) to a company say in the IT
business, the ITC of GST paid on the invoice raised by the works contractor will
not be available to the IT Company.